HISTORY OF ETHANOL IN BRAZIL: 1979 ISSUE OF VEJA MAGAZINE PROVIDES GLIMPSE INTO FUTURE FOR GLOBAL BIOFUELS – PART II

(For the first installment in the series, click here)

We continue our journey into the early days of Proalcool, Brazil's National Ethanol Program, with the second part of my translation of the article "The Petroleum from Sugarcane". The piece came out in the June 13, 1979, issue of Veja Magazine. The title of this second installment, "The Gordian Knot", conveys the many doubts, suspicions, and interests that surrounded the fuel's introduction.

Highlights:

* Proalcool, sponsored by the Brazilian president himself, faced considerable resistance from the middle levels of government. Four years after its legal institution through a presidential decree, the Program, half-starved of funding, still had little to show but promises.

* Joao Sabino Ometto, a representative of the traditional sugar and ethanol companies at the time and a member of the family that went on to establish Cosan, was understandably eager to see the program implemented.

* Brazilian consumers in the 1970s regarded the new fuel with suspicion, but the government ploughed ahead with Proalcool just the same.

* Brazilians blamed oil prices for the rampant inflation of those years - a fact that suggested to market researchers that there was indeed a market for ethanol.

* But, battered by a chronic national sense of inferiority, consumers doubted that any solution made in Brazil would work.

THE GORDIAN KNOT

So is Proalcool hopelessly lost in the scramble for energy? Makers of equipment for distillation plants swear that that is not the case. They guarantee that the current production figures for ethanol could have been beaten two years ago, if the government had released, in a more forthright manner, the promised funds. Such criticism is correct to a certain extent - so far, in the four years since its inception, Proalcool has used up only 24 billion cruzeiros (the Brazilian currency at the time), which is less than USD 1 billion. And, of the 228 projects that have been approved, only 104 have been actually built – 89 of them are distilleries constructed next to older, existing sugar plants. In other words, a large part of the production of ethanol is still coming from traditional sugar companies. There are only a handful of entrepreneurs participating in Proalcool, as most are discouraged by the slow pace of the disbursing of funds.

To Joao Guilherme Sabino Ometto, director of Companhia Industrial Paulista de Alcool and of Grupo Pedro Ometto – the largest individual producer of sugar and ethanol in Brazil - such slowness has a purely political explanation. “Private companies associated with Proalcool are 100% Brazilian, and, therefore, unable to exert enough pressure to force the Brazilian government to accelerate so fundamental a program”, he laments. There is no doubt that the gamut of interests surrounding Proalcool – in favor and against – has blocked its development .

And such interests may, in fact, constitute the Gordian knot that must be untied to make this new source of energy feasible. Another good reason to support Proalcool is that, from the point-of-view of the those with the most to gain - in other words, the consumers-, the ethanol alternative, although still seen with suspicion by many, would end up being easily accepted, according to specialists.

NO PREJUDICE – Regardless of the historical prejudice felt by Brazilians with regard to their own country's solutions, they would accept ethanol in the end for a simple reason: no one wants to do without automobiles.

“All the research we have conducted indicates that consumers associate runaway inflation and the rising cost of living with the petroleum problem. So we believe that there is a willingness to accept ethanol,” states Clarice Herzog, a specialist with twelve years’ experience in market research, and currently head of research at Standard, Ogilvy & Mather Advertising.

History of Ethanol in Brazil: 1979 Issue of Veja Magazine Provides Glimpse into Future for Global Biofuels

("Will It Work"? This 1979 edition of Brazil's Veja Magazine reveals the hopes and doubts surrounding the introduction of ethanol in the country)


Veja Magazine has been the main Brazilian news weekly since 1968, a kind of Time Magazine and Newsweek rolled into one. It is printed on glossy paper with easy-to-digest information, presented in articles that span from one to four pages.

Veja does a good job of capturing the Brazilian zeitgeist. So I decided to go back and check issues from the 1970s, when the Brazilian National Ethanol program, Proalcool, was being instituted.

What did Brazilians think of the program back then? What was the government’s strategy to introduce a novel fuel to the world’s tenth-largest economy, a country with a population of 120 million at the time? What were the roadblocks and pitfalls?

Below is the first installment of a series of translations of Veja articles from that time. It makes for a fascinating read, as we encounter the exact same doubts, gripes, and motivations, both declared and undeclared, that we are witnessing today on a global level.

Petroleum from Sugarcane

Go to original

After years of hesitation, the Brazilian government has decided to make up for lost time and institute ethanol as the best alternative for the future.

June 13, 1979

It would be, in the opinion of its enthusiastic defenders, a sure passport to a problem-free energy future. And with formidable powers to single-handedly solve a good chunk of the country's problems, doing away, in one fell swoop, with the dark clouds that hover over the automobile industry, the balance of trade, the unemployment rate and inflation. But, in spite of all these qualities, the National Ethanol Program (Proalcool) will remain a vague promise, far from an effective path to rid Brazil of the petroleum nightmare.

Born in 1975, Proalcool ended up having to wait for an unfettered, disorderly break-out of petroleum prices that threatens to shake the Brazilian trade balance, this year with a likely shortfall of approximately USD 7 billion – about 50% of imports – to receive hope from the government. Such was the winning intention at last Wednesday’s meeting of the Council for Economic Development (CDE) in Brasilia, when new, ambitious goals and resources were added to the plan.

GLOBAL CONCERN – “This time, we won: the CDE has cinched the deal and there is no turning back now from Proalcool”, the Minister for Industry and Commerce, Joao Camilo Pena, said to a friend, as he left the meeting in a state of euphoria. In fact, the CDE decided to invest USD 5 billion in Proalcool, until the end of the Figueiredo administration (1979-1985), in order to reach an equally-ambitious number: 10 billion liters (2.64 billion gallons) of ethanol per year. With such a volume, the government expects to meet, over the following six years, additional demand for gasoline, while fully supplying 475,000 vehicles with adapted engines and 1.225 million others with a factory-made ethanol-powered engine.

Cautious, many technical personnel believe that it would be more realistic to cut the approved goals by half. Likewise, among economists, businessmen, and consumers, there is no lack of people who are relatively cool to the measure. And such an attitude is hardly surprising. After all, this is not the first time that, after a CDE meeting, ministers of state proclaim the beginning of a new energy phase in Brazil. In January 1977, for example, then-president Ernesto Geisel, at a meeting of the same Council, supposedly assigned absolute priority to Proalcool – “with unlimited funds”. However, three years after its creation, weak statistics flow from Brazil’s distilleries. Doses that are, without a doubt, below the national thirst for fuel in a country that consumes 1 million barrels of oil per day, 85% of which is imported. For this year’s harvest, for example, billions of liters of ethanol for blending are expected to be produced. They will be added, at a 20% grade, to the 15 billion liters of gasoline consumed by the 7 million vehicles in the Brazilian fleet. And, even if the goals set by the CDE materialize in 1985, the situation would not change things substantially, pessimists contend.

(to be continued)

France’s Louis Dreyfus Acquires Significant Stake in Santelisa Vale, Will Mill More Sugarcane than Australia

Santelisa Vale, a company formed in 2007 after the merger of the Santa Elisa and Vale do Rosario sugar and ethanol companies, has just sold a significant stake to Louis Dreyfus Commodities Bioenergia S.A. The exact numbers have not been disclosed.

Before the deal with Louis Dreyfus was approved on Monday, April 6^th, a host of other contenders, including Sao Martinho and Bunge, had attempted to woo Santelisa Vale. At the time, offers for a 40% stake were estimated by the local business media at BRL 3 billion, or USD 1.4 billion.

Together, the two companies will have a combined yearly processing capacity of 40 million tonnes of sugarcane – more than the entire Australian output in the 2007-2008 harvest year, a paltry 36 million tonnes. In milling capacity, Santelisa Vale-Louis Dreyfus are also just a step behind Cosan, the world’s largest producer of sugar and ethanol, which milled 40.3 million tonnes in the 2007-2008 season, producing 3.24 million tonnes of sugar and 1.52 billion liters (400,000 gallons) of ethanol (see MD&A, p. 4, in Form 20-F here). One tonne of sugarcane yields, on average, 80 liters, or 21.16 gallons, of ethanol.

Santelisa Vale is choking on the debt it took on in March 2007 to finance its acquisition of Nossa Senhora do Vale do Rosario. At the time, the owners of Santa Elisa, the Biagi family, offered Santa Elisa itself as collateral and took on USD 675 million in debt from Bradesco – until recently, Brazil’s largest private bank. Now they are struggling with a debt load of BRL 3 billion, or USD 1.4 billion.

With the acquisition of a stake in Santelisa Vale, Louis Dreyfus is extending its shopping spree in Brazil. In February 2007, the company doubled its local milling capacity when it acquired four mills belonging to the Tavares de Melo Group. At Santelisa Vale, Louis Dreyfus joins a select group of investors and partners that includes Goldman Sachs, Global Foods, Carlyle/Riverstone, and Discovery Capital.

Other European players are also significantly expanding their production and trading operations in Brazil. Sucden, Tate and Lyle, Czarnikow, and Tereos, which owns Acucar Guarani, are all helping their respective countries in Europe diversify away from sugar beets.